A bridging loan is a secured loan where lenders, such as mortgage broker require borrowers to use their property as collateral if loan repayments are not paid adequately. In other words, it allows borrowers to buy a new property without selling their existing property if desired. The total amount of outstanding debt accumulated between the borrower’s new and existing property on a bridging loan is known as the peak debt, and lenders may cover up to 90% of peak debt with a bridging loan. Costs leftover from the bridging loan is known as ongoing balance or end debt (i.e., the principal of the bridging loan).
Bridging loan types. Bridging loans can either be closed or open. Borrowers should be interested in a closed bridging loan if they intend on selling their property. Lenders see closed bridging loans as less risky as the borrower will agree on the sale date of their existing property and apply the sales to the principal of the bridging loan. Open bridging loans are for borrowers who do not intend to have a sale date on their existing property. An open bridging loan requires borrowers to take out a relatively significant amount of equity on their current home.
Financing a bridging loan. Serviceability requirements for a bridging loan require borrowers to exhibit proof of income, employment status, expenses, and other supplemental documentation similar to refinancing processes. Borrowers that do not have a steady income may still be able to obtain a bridging loan when the equity of the existing home overcompensates the purchase price of the new property. Lender’s mortgage insurance (LMI) does not cover bridging financing, meaning if a deposit is required for a bridging loan, the borrower will need to consider using savings or applying for a deposit bond.
Costs of a bridging loan. Initial costs include the borrower receiving two separate property valuations for each property to present to the lender to support the loan amount request. Then, loan application fees apply. LMI fees are also expected to be paid by the borrower. Capitalised interest can also be more significant than typical home loans, especially if the existing property is not intended to be placed on the market. For smart borrowing, borrowers are recommended to have at least 30% in equity in their current home or rent out the existing property while living in the new property to minimise the loan term by making extra repayments.